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Can This Fragile Market Hold?

Friday's tape action was almost a mirror of Thursday's action,
with a weak opening and then a modest bounce that failed to
overcome the early losses. And with that, U.S. stocks declined for
the second week in a row as economic concerns kept investors away
from equities.

A weak euro and lower overseas markets also kept a lid on a
recovery. Renewed debt concerns in Europe outweighed a resurgence
in takeovers and acquisitions despite deal activity being at its
highest since late last year.

December gold fell $6.60 to settle at $1,227.20 an ounce. The
PHLX Gold/Silver Sector Index
(NASDAQ:
XAU
) was down 1.16 points, closing at 178.13.

What the Markets Are Saying

Since Aug. 1, the major indices have double-topped at their June
highs and plowed through their major moving averages, finally
halting on Friday at a critical support zone. For the S&P 500,
that zone begins at about 1,055 and extends to 1,040. In it is the
"flash crash" low of 1,065.79, the Feb. 5 low of 1,044.5, and
double-bottoms at 1,040 and 1,042 of May 25 and June 8. Resistance
for the S&P 500 is at the 1,100 mark where it topped twice this
past week.

It goes almost without saying that a close below the 1,055 to
1,040 support zone could lead to an immediate test of the July low
at 1,011. The zone has marked the low boundary of trading since
early this year, while the upper limit has been at around 1,130 to
1,150.

The big question is: Will this important zone hold?

Michael Ashbaugh points out that "the S&P staged a 37-to-1
downdraft through the 1,100 mark last week, and followed up on
Thursday with a 12-to-1 sell-off from the 1,100 mark." He points
out that this is very negative, and that a retest of the 1,040 area
is increasingly likely.

S&P's Mark Arbeter says, "Sectors and indices that lead bull
markets are underperforming and this may eventually lead to a break
of the July lows." He goes on to say, "While the stock market has
remained range-bound for much of the past three months, some of the
key areas of the market have underperformed, and this, in our view,
may portend to an eventual break of the current trading range.
During bull markets, it is important to see leadership among
growth, cyclical, financial and higher beta names, in our opinion,
and unfortunately, some of these areas are not acting healthy."

My take is this: All of our internal indicators are oversold
with the indices now at the major support that has held for almost
eight months. Thus, the chances of a "dead cat bounce" from this
level are very high. However, the upper resistance for the S&P
is very close and it is the formidable 50-day moving average line
now at 1,088 with the 1,100 line just above it.

If the S&P can manage to hold its ground through Labor Day,
my guess is that stocks will gradually move higher in response to
election polls. But the current support is now very fragile, and an
immediate break below 1,040 could lead to a total collapse of the
current support structure.

Stand aside until this dilemma is resolved.

Today's Trading Landscape

Earnings to be reported before the opening
include:
Kensey Nash, Sanderson Farms, Stealthgas and Tuesday Morning.

Earnings to be reported after the close include:
Focus Media.

There are no significant economic reports due today.

If you have questions or comments for Sam Collins, please
e-mail him at
samailc@cox.net
.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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